Tag: Ameritrade

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December 2019 optimal portfolios and ETF industry consolidation

The December 2019 optimal portfolios are now available to ETFMathGuy subscribers. So, please log in and select your discount broker to see the effect of current market conditions on your optimal portfolios. In this post, we will also discuss some consolidation in the ETF industry and how it may affect your brokerage accounts.

ETFs can be a low-cost way to invest in the stock and bond markets. But, consolidation is occurring with ETF brokers.
Source: WSJ.com

Schwab announces its purchase of TD Ameritrade

The announcement of a consolidation in the discount brokerage industry occurred in November. The $0 commission fee war started recently likely contributed to this industry change . This news is especially problematic for ETrade, who manages 5.3 million brokerage accounts. By comparison, Fidelity has nearly 30 million brokerage accounts and the combined Schwab and Ameritrade would have 24 million. Given that discount brokers increase profitability with the scale of their operations, ETrade could struggle in the coming years. Or, put another way, commission-free ETFs are reducing revenue of discount brokers. There is interest at ETrade for an acquisition, but no firms have stepped forward yet.

“If you put your hand up and say you’re on sale, and nobody shows up, that can be seen as a negative,”

Devin Ryan, an analyst at JMP Securities, discussing ETrade’s interest in being acquired.

Should you switch to a different broker?

A recent review of online brokers put ETrade in 4th place. There was a 3-way tie for 1st place between Schwab, Ameritrade and Fidelity. Vanguard appeared in 5th place. Our opinion is that the subtle differences between brokers may be indistinguishable to many retail investors. We believe costs should be paramount as they create a drag on investment returns. For this reason, we recommend that if you are already with one of these five brokers, it probably isn’t worth the time to make a change. However, you may wish to revisit this decision if industry consolidation continues and fees change.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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More ETFs trading commission-free

The year of 2019 has seen a dramatic shift in the costs to trade ETFs. There are now four discount brokers who offer nearly all ETFs commission-free, including Ameritrade, Fidelity, Schwab and Vanguard. But, as we’ve discussed previously, investment returns depend on another cost too. We discuss this other cost here, and suggest alternatives to help minimize it.

How many commission-free ETFs are there now?

There are many ETFs available today covering broad and narrow aspects of the market. According to my favorite screener at ETF.com, and excluding leveraged and inverse ETFs, there are 2,052. That is a lot of choices for any investor to consider. Here at ETFMathGuy, we prefer optimal portfolio construction. That is, selecting ETFs that compliment one another in a diversified portfolio. Prior to this construction, we also screen ETFs to ensure each portfolio avoids ETFs with (i) low volumes and (ii) short track records.

The other cost: the bid-ask spread

The hidden cost of buying and selling an ETF is the bid-ask spread. So, investors should conduct some due diligence to reduce this cost whenever possible. Based on the latest data from ETF.com, we constructed the chart below. As it shows, thinly traded ETFs or ETFs that have less-liquid underlying securities still persist in about 10% of ETFs available today. Fortunately, a little more than half of ETFs have a bid-ask spread under 0.15%.

Number of ETFs and their bid-ask spreads, as of November 2019.
Source: ETF.com’s ETF Screener & Database

Conclusions

Commission-free ETFs are good news, as they reduce the cost of investing in ETFs. However, care should be taken to avoid other costs, like the bid-ask spread. To help avoid this cost, investors should seek more liquid ETFs with lower bid-ask spreads, or find ways to trade less frequently. In any case, commission-free doesn’t mean there are no transaction costs, and investors would be wise to choose their ETFs with care.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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November 2019 Portfolios and a Thank You to our Subscribers

The November 2019 optimal portfolios are now available to ETFMathGuy subscribers. So, please log in and select your discount broker to see the effect of current market conditions on your optimal portfolios. In this post, we will also discuss some changes to ETFMathGuy.com for 2020, and a special offer for current subscribers.

Changes coming to ETFMathGuy.com for 2020

2019 has been a good year for ETFMathGuy.com. We have seen significant growth of investors interested in optimal portfolios using ETFs. Our subscriber base has also grown substantially, but so has our cost of running this service. So, beginning in January of 2020, we will be making changes to our subscription program. Subscription pricing will become as follows:

$9.95 / month or $79.95 / year for individuals

If you are a financial adviser and wish to continue using our portfolios to help guide investment decisions for your clients, please contact us for institutional pricing. This pricing will apply to portfolios we produce each month from the following brokers’ commission-free ETFs: Ameritrade, ETrade, Fidelity and Schwab

As a “thank you” for anyone who starts a free subscription before the end of the year, will will provide discounted subscription fees. So, please share this opportunity with other like-minded ETF investors you may know, and stay tuned for more details!

Continuing benefits of a free subscription

We realize that some of you may not want to pay for a subscription. So, for those who don’t upgrade, your free subscription will continue. Your free subscription will include access to the Vanguard optimal portfolios. It will also include email updates on our periodic commentary on market conditions and trends in ETFs.

Vanguard offers commission-free ETFs.
Optimal portfolios using Vanguard Commission-free ETFs will continue to be available without a monthly or annual subscription fee.

Thank you all for an amazing first year of ETFMathGuy!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Is direct indexing better than buying an ETF?

Direct indexing may be gaining popularity soon, thanks to a continued fee war between several large brokerages. Both Schwab and Ameritrade recently announced commission-free stock trades, in addition to their commission-free ETF trades. This may sound like an appealing alternative, but direct indexing is far from simple.

What is direct indexing?

Direct indexing creates a portfolio that tracks an index through buying individual stocks. So, in the case of the S&P 500, you would invest in common stock from the 500 companies that make up the index. By eliminating the commission for each trade, the cost barrier of buying and selling each stock goes down significantly. However, it still requires many trades. In the case of the S&P 500, there are actually 505 common stock listings for the 500 companies in the index. It turns out that a few companies, like Google, have two share classes. So, one could eliminate the expense ratio of 0.04% currently charged by the iShares Core S&P 500 ETF (ticker: IVV). For a $100,000 portfolio, that is a savings of $40 a year. For portfolios of this size, I would argue that the convenience of trading a single ETF is worth $40 a year.

Tax benefits of direct indexing

When an investor builds a portfolio of common stock with direct indexing, they get more control over its holdings. While ETFs are known to be very tax efficient, tax loss harvesting is not possible at the individual security level. This benefit doesn’t make a difference in retirement accounts that aren’t paying taxes on selling stocks, but can be significant in taxable accounts for high income earners.

Conclusions

I am happy to see commissions for stock trades hitting $0, but I’m not convinced that for most investors, direct indexing makes sense. There is a cost savings, but the additional effort could be significant. And, if your larger investments are in tax-deferred or exempt retirement accounts, there aren’t any tax benefits available anyway. Tax loss harvesting appears to be the most compelling reason to direct index. It is most beneficial to individuals paying the highest marginal tax rates.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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May 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

The 2019 optimal portfolios for the month of May are now available to subscribers of ETFMathGuy. Just log in and select your discount broker.

You can now view the current optimal portfolios for the five discount brokers analyzed by ETFMathGuy. These portfolios cover nearly 1,500 ETFs currently offered commission-free from Ameritrade, ETrade, Fidelity, Schwab and Vanguard.

Portfolios now include updated ETF lineups from Ameritrade, ETrade and Vanguard

As we mentioned in our last post, Ameritrade, ETrade and Vanguard expanded their commission-free lineup. So, the portfolios for the month of May now consider these new funds. Here is a simple count of the number of commission-free ETFs now available from our five discount brokers. Note that IRA accounts exclude the 46 municipal bond ETFs discussed in our recent article.

Commission-free ETFs for Taxable and IRA accounts, as of April 30, 2019

However, this lineup change does not significantly alter the ETFMathGuy portfolios. Remember that several years of price history are necessary to build optimal portfolios. So, ETFs that haven’t been around very long will not be considered as part of the later stages of the portfolio construction process.

Unsure of which discount broker to pick?

If you haven’t yet settled on a discount broker that offers commission-free ETFs, consider the following. Last month, we showed the updated expense ratios and bid-ask spread for Fidelity and Schwab’s commission-free ETFs. Below is the updated information for our other three brokers, Ameritrade, ETrade and Vanguard.

Expense ratios, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.
Expense ratios, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.

It is pretty clear that, when it comes to expense ratios, Vanguard is the clear winner. The same can be said for Vanguard’s advantage with generally lower bid-ask spreads.

Bid-ask spreads, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.

Bid-ask spreads, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.

So, is Vanguard the best broker for commission-free ETF portfolios?

This is an excellent question. In terms of number of commission-free ETFs, Schwab is the leader. But, on the basis of cost, Vanguard is the clear winner. What about diversification? Perhaps the diversification benefit of the Schwab (or some of the other discount brokers) can offset their higher costs? We will explore this topic in a future blog post. Stay tuned!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Discount brokers adjust and expand their commission-free ETF lineup

A few weeks ago, we discussed the expanded commission-free ETF lineup offered by Fidelity and Schwab.

In this post, we revisit the current commission-free ETF lineup offered by the three other discount brokers analyzed by ETFMathGuy. These three brokers include Ameritrade, ETrade and Vanguard.

Ameritrade’s updated lineup of commission-free ETFs

Ameritrade continues to offer 308 commission-free ETFs. Our list used to develop optimal portfolios at ETFMathGuy at the end of last year did change somewhat. Seven ETFs ceased trading in February and March, and most were from WisdomTree.

Seven ETFs ceased trading in February and March, 2019, and were removed from Ameritrade's commission-free ETF lineup.
Seven ETFs ceased trading in February and March, 2019, and were removed from Ameritrade’s commission-free ETF lineup.

Ameritrade replaced these ETFs with seven commission-free ETFs. These replacements come from First Trust, State Street, iShares and Invesco.

Ameritrade added seven funds to their commission-free ETF lineup.
Ameritrade added seven funds to their commission-free ETF lineup.

ETrade’s updated lineup of commission-free ETFs

ETrade made a modest increase to their commission-free ETF lineup, increasing from 259 to 274. Their lineup change was due to removing a number of funds from Vanguard. In addition, and like Ameritrade, many of these ETFs from JPMorgan, Legg Mason and WisdomTree ceased trading.

Fourteen ETFs removed from ETrade's commission-free ETF lineup.
Fourteen ETFs removed from ETrade’s commission-free ETF lineup.

The additional commission-free ETFs offered by ETrade come from a variety of ETF providers, such as Invesco, WisdomTree, iShares and others. The real question here is will these new funds be around for the long haul.

Etrade's commissoin-free ETF lineup includes 29 additional funds.
Etrade’s commissoin-free ETF lineup includes 29 additional funds.

Vanguard’s updated lineup of commission-free ETFs

Vanguard made the smallest change to their list of commission-free ETFs, adding only two funds. Consequently, Vanguard’s total lineup increased from 57 to 59, and embraces a new trend in Environmental, Social and Governance (ESG) investing.

Vanguard expands their commission-free ETF lineup.
Vanguard expands their commission-free ETF lineup.

So what does this mean for an individual investor?

So what this means to an individual investor? A larger number of commission-free ETFs should provide a greater opportunity for diversification and possibly higher returns. Evidence for this appears in the expected returns and volatility estimates in the latest portfolios developed by us at ETFMathGuy. However, what if you are an investor who had invested in one of the ETFs that ceased trading? An article claims that the liquidation process is mostly painless for the investor. It also claims that even if you don’t sell the ETF before it ceases trading, “you are still going to get fair value for the fund based on the final liquidation”. The bigger issue is how removal of the ETF affects your asset allocation and underlying strategy. If you are following the current portfolios at ETFMathGuy, we have already updated our databases to accommodate such a change.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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April 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

The 2019 optimal portfolios for the month of April are now available to subscribers of ETFMathGuy. Just log in and select your discount broker.

You can now view the current portfolios for the five discount brokers analyzed by ETFMathGuy. These portfolios cover over nearly 1,500 ETFs currently offered commission-free from Ameritrade, ETrade, Fidelity, Schwab and Vanguard.

What’s new? Full ETF names, portfolio & benchmark statistics, and portfolios for taxable and IRA accounts.

So, what’s new this month? First, we’ve added the full name of the ETF, so that subscribers don’t need to look up individual ticker symbols. For instance, the portfolios continue to favor the utility sector. So, for example, the Vanguard portfolio lists both the ticker “VPU” and its full name, “Vanguard Utilities ETF”, in the portfolio tables.

New information available on 2019 optimal portfolios from ETFMathGuy
New information available on 2019 optimal portfolios from ETFMathGuy

Second, we’ve added portfolio annualized statistics for expected return and volatility. Now, it is clear what the risk levels are set to in portfolio construction, regardless of the discount broker. For the month of April, annualized risk levels were

  • Conservative: 5.7%
  • Moderate: 8.3%
  • Aggressive: 11.0%

Third, we’ve added benchmark statistics. These measures are an excellent way to understand how the optimal portfolios match up to the broad stock, bond and cash benchmarks used by ETFMathGuy.

Last, but not least, we’ve run our portfolio construction process to include and exclude municipal bond ETFs. As mentioned in our recent post, brokers like Fidelity often restrict the use of municipal bond ETFs in IRA accounts. The summary table at the top of the current portfolios now indicate either Taxable or IRA (no munis).

We hope you find these 2019 optimal portfolios insightful and educational! If you enjoyed reading this post, we hope you will share it with others in your personal or professional network. Just click one of the icons below. And, for a limited time, subscriptions are free!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Commission-free Municipal Bond ETFs and a diversified portfolio

Commission-free ETFs cover a number of important asset classes, including municipal bonds. “Muni” ETFs can add an important asset class to a diversified portfolio, as returns often differ from other bond ETFs. “Muni” bond ETFs also carry the important benefit of tax-exempt interest.

“…munis are well-known for delivering tax-exempt interest”

Cinthia Murphy, ETF.com, March 18, 2019

Not surprisingly, discount brokers like Fidelity don’t permit their use in tax-advantaged retirement accounts, like IRAs. Since there are currently 46 municipal bond ETFs, most retirement accounts really don’t have access to the full list of commission-free ETFs advertised by discount brokers. The chart below summarizes the number of commission-free ETFs available. It includes the five discount brokers analyzed regularly by ETFMathGuy to develop optimal portfolios.

This chart shows that no single broker offers all 46 “muni” ETFs commission-free. But, Schwab and Fidelity offer the most at 12, followed by ETrade (11), Ameritrade (10) and Vanguard (1).

So, what does this mean for a diversified portfolio with commission-free ETFs? ETFMathGuy will be expanding portfolio construction to include both IRA accounts (that don’t include municipal bond ETFs) and taxable accounts that do.

Please be sure to check back at the beginning of April to see how municipal bond ETFs affect the diversified portfolios created by ETFMathGuy.


ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.